By Andrew Patterson
Pacific Edge has made quite a splash on the NZX in recent days and may well claim a new record with a 223% lift in its share price in just two weeks.
It’s the latest example of a market that seems to be embracing the opportunity to back some of New Zealand’s emerging technology offerings and the potential they have to give investors the ride of their lives.
The latest surge in the Pacific Edge share price follows news that it had secured a second major customer in the US (America’s Choice Provider Network) adding to its earlier announcement of a deal with FedMed, along with details of a $20.5 million 2 for 15 renounceable rights issue to existing shareholders priced at just 55c; well below Friday’s closing price of $1.49.
The combination of its two latest customers will give more than 54 million Americans access to its Cxbladder test; potentially a significant revenue earner for the company – something the market is already betting on.
Capping off a dream week for the company, Pacific Edge was last week named as the Supreme Winner at this year’s New Zealand Innovation Awards.
Despite reporting a $6.9 million loss for the latest financial year CEO David Darling remains upbeat about the company’s future prospects and has welcomed the enthusiastic market response to the listing; though is somewhat taken aback by the events of the last 10 days.
“The last two weeks have certainly been something of a roller coaster ride.”
“We were genuinely surprised at both the breadth and extent of the run that we got off the share price. The information has been long awaited and we knew that it would have an impact but not to the extent that it did.”
“It just goes to show the depth and desire to invest in opportunities of this nature, and you’ve seen it in Rod Drury’s Xero and now you’re seeing it in our technology as well.”
The long haul to success
Listed in 2001 with a public offering of 12 million partly paid shares at 25 cents apiece, Pacific Edge has toiled away in the background researching a range of cancers with the aim of commercialising intellectual property acquired from the University of Otago.
The company has published research showing the non-invasive Cxbladder procedure is more successful than current offerings such as cystoscopy which is considered more costly and invasive.
Commercialisation of the test comes after some $38 million of capital investment on Cxbladder and a range of other diagnostic tests to be rolled out in the future.
Darling says that the company’s recent success is a reflection of the time it has invested in its research and development technology in order to deliver the outcome it had been seeking.
“Anything with the word 'bio' in it is generally on a 7-10 year development cycle and so that's always a challenge to get the business founded and to get it growing.”
“In the first instance there's often a catalyst. In our case it was the death of a young girl from a disease – from a complication associated with cancer. It really triggered the question that we should and could and need to make these tools so that we could see and find and manage cancers better. Concurrently with that the human genome had just been sequenced so there was a huge opportunity to take that sequencing opportunity and say: can we find genomic bio-markers, that we can bolt together to make tools that have superior accuracy in helping and finding and managing cancers?”
“When we started there really wasn't anything known about this issue. In fact there was almost no probability that this was going to work and there were a number of other companies that were starting up in the US who were trying to do this as well. While I have great faith in the technology and the microbiologists, cancer is very heterogeneous and finding those bio-markers is not straightforward.”
Structuring the R&D process
Pacific Edge set about establishing a very structured approach to its R&D working with clinical advisers, oncologists, technicians, which it says set it apart from other organisations that were just being driven by what are described as “gene jockeys” – those only interested in mining the data.
The careful segregation of the tumours while ensuring there was no degradation of sample gave the company the opportunity to get the discovery events that others weren't getting.
Spending three years building a database where gene expressions from normal cells were compared to those of the tumour and then looking for the genes that were either up-regulated or over-expressed was a critical aspect of the research process. The intention was to find some bio-markers that could literally be bolted together.
Darling says that it was at this point that the company began to recognise the value of the IP that it had developed.
“We started patenting when we had some 2000 bio-markers – genes that were over-expressed for any one cancer, and then we'd whittle that down progressively on the differences and features which involved a lot of science, a lot of different technologies and a lot of techniques.”
“We built a customised arrayer inside the organisation, and we went to AWG, a German company that specialises in the development on synthetic genes. We were the first commercial company in the world to go to this organisation to start using the synthetic pieces of genes - called oligonucleotides.”
“We ordered a bunch of these and set about systematically mining five cancers and building his gene expression database. That database has become our cornerstone asset. After three years we then shut it off and said: let's go into this database and see if we can pull out some prototypes which we eventually found. They were a bit rough but looked very promising.”
“The original business plan was all about doing great discovery and harnessing this scientific horsepower we had developed. We had some great founders as well, including Parry Guilford, our Chief Scientific Officer. Parry had made some major milestones with gastric cancer with his E-cadherin gene discovery which is often lauded around the world as being one of the great discoveries to have come off the back of the genome sequencing project. We had a real hotshot leading the charge in the scientific field.”
Going the whole way has paid dividends
Pacific Edge’s plan was to take these prototypes, go to the big blue chip diagnostic companies like Roche and Bayer and licence them to use the technology and let them take it to market.
Darling says that when he visited Roche in the US they were impressed.
“They said to us: wow, great science, fantastic. We don't really do this stuff to this degree, how about you guys keep going and then when you knock off some more risk, and you've polished this thing up a little bit more, well we'll buy it off you and we'll take it to market."
“So went back to the board, to the shareholders and said: look, the next step isn't that big, why don't you just inject some more cash and we'll do the science ourselves and we'll step it up. Bit by bit, we kept getting the news and we kept dragging this thing all the way up to the point of doing a clinical study and by that stage you're so close to the market that you might as well do the rest of it yourself, which is exactly what we ended up doing.”
“We'd dragged these guys who are first class discovery scientists right through this whole commercialisation cycle, from discovery of prototypes, to validating the prototypes, setting up the clinical studies, to getting that outcome, riding the peer-reviewed science papers and then doing all the standard operating procedures and doing all the clear regulatory approvals. So these guys have got a huge bandwidth and that capability is locked into our organisation now. We feel very comfortable about taking bio-markers that others have discovered and bringing them to bear, either with some of ours or their own and making these products because we know how to do this.”
The new product offering
So what exactly does the Cxbladder product will do that couldn't be done previously?
Darling describes it in terms of one of those before and after stories.
“You have to go back to the clinical understanding of what happens with people when they present with symptoms of bladder cancer. These symptoms are blood in their urine, it’s called haematuria. There's macro or visible blood in the urine, and there's micro haematuria. These patients, by deed of clinical guidelines because of the probability that they have cancer, all need a full urological workup.”
“Most of those spin off the gold standard which is known as cystopathy, and it's a black rubber tube that goes up the urethra and it scopes the bladder. It's expensive and it's invasive and it does miss tumours. And so because of that, the urologist will often bolt together a whole bunch of tools. There can be cystopathy and cytology as an adjunct. They can have ultrasound as well as CT scans and those combined have a huge complementary cost to understanding whether or not this person has bladder cancer.”
“By comparison, our technology is very clever, very sharp, very accurate. You pee in a pottle, put the tube into the pottle, its vacuum loaded, it draws up a sample and it gets sent to our lab. We check for gene expression for these five bio-markers, and we can quantitatively tell you how many of those genes are being expressed and therefore the probability that you have cancer.”
The process is simpler, cheaper, smarter and more accurate. What’s particularly important for patients with bladder cancer is that it's a highly recurrent disease. 70 percent of those tumours recur after they've been treated and 30 percent of those that recur then progress.
“From the time you’re diagnosed with it, you're put on to this very long monitoring program which involves a lot of cystocopies and those cystocopies are very expensive and invasive.”
“This creates a compliance problem because nobody wants these things. Of course the urologists need them to understand and manage the disease. So a technology like ours that comes along that's non-invasive, cost effective and at the pointy end of accuracy, is exactly what the specialists have been wanting.”
Investing in R&D and raising capital
R&D is an expensive business, particularly in the bio-med space. Darling says that spending isn’t over yet.
“Prior to raising $20 million in 2011, we'd invested approximately $18 million. And so you're now looking at $38 million and we're just on the cusp of raising another $20 million. We've had a very small team of people, we've been highly focused, and this program has been working on five cancers we started with, but quickly migrated to having the lion share of our program focused on the commercialisation of bladder cancer. So now we are very much a uretherial shop.”
Like all technology businesses, raising the capital has had its challenges along the way but Darling says that knowing what he knows now he doesn’t believe he would have done things any differently.
“The company was kind of an ugly duckling in that we were forced, by lack of capital, to list very early on. So one year after we were born we listed and that's not uncommon for companies in Australasia. It's less common in the US although now interestingly enough it's starting to be prevalent in the US as well. And so we listed on the NZX main board as there wasn't a secondary exchange at that time.”
“We had a very small tight group of shareholders and they're very loyal people, and without those people we just wouldn't be here today. They bought into the vision, they understood the progress and we've kept them well appraised of our progress along the way and they've continued to dig into their pockets whenever we've needed the cash. We've kept a lean mean machine, we've hit our milestones, we've done some great discovery, we've built some nice prototypes and now we have a product in the market. Next year we'll have two more products in the market. It's been a great journey for them, albeit somewhat longer than they may have thought and certainly what we thought as well. But it's been a fantastic journey.”
University of Otago relationship
The relationship with the University of Otago has also been an important aspect of Pacific Edge’s success
“They saw us as an opportunity and a pipeline to take all things cancer genetic related to the market. We have a legacy agreement with the university that says that the cancer genetic research comes to us and we're able to help with the development of that in the later stages, and because of that we have a very strong relationship with them.”
“Parry Guildford our CSO spends a lot of time driving the cancer genetics laboratory inside the university and we are able to take those discoveries and bring them into the company.”
As for advice to pass on to those in the bio-med field looking to follow in Pacific Edge’s slipstream, Darling is emphatic.
“You've got to look to the macro environment and if you can find partners to stay with you that's great. Keep a very sharp eye on the vision. Make sure you continue to communicate that vision. Everybody's a stakeholder so you spend a lot of your time communicating. I wake up every day and I know I’ve just got keep running and peddling faster. You burn up huge amounts of energy. Get some good advice, if you're in the field of clinical work; make sure you drive those clinical decisions from day one with clinicians. That's what we did. We went out and asked them: what would we need to do if we're going to make a difference to the way you do your work? What single thing can we change for you?"
“So this wasn't just a bunch of scientists that got together and said: Let's play with some genes and then see what we can do. This was all about understanding what the clinicians need to endure and where their problems occur and solving that problem accordingly.”
More product offerings on the way
And watch for more innovation to come from Pacific Edge in the future.
“It’s very important for us that we build a robust portfolio of products. If you're just dependent on one product, there's an inherent risk for the investors, but more importantly when you get in the market, you want to be able to have a one stop shop. We see that as very important in our company.”
“We've got some pretty robust revenue earning targets and plans for getting these products into the market. So next year we're targeting two new products to market and we've set ourselves a reach target of $100 million of gross revenue per annum by the end of our fifth year of trading.”
“We've modelled this environment a lot. There's no precedent for this, we don't know what the trajectory is. We don't know what the penetration curve looks like from the get go to the market but we have an inherent sense that we can get to this $100 million and I’m very optimistic we’ll get there based on our modelling.”
“Getting to this point has been very satisfying and also very humbling. We have a great team of people and it's has been a long haul but it's a great honour to be able to take this forward and see some of the promises we made to investors finally being delivered. It’s great.”
|Sector:||Technology / Bio-med|
|Biggest potential market:||Asia|
|Staff:||31 (19 Dunedin / 2 Australia / 10 USA)|
|Market cap:||NZ$ 410 million|
|Turnover target:||NZ $100 mln within 5 years|
|Recent highlights:||Securing two major customers in the US, launching a rights issue and being named as the supreme winner at the NZ Innovation Awards|